Corporate taxation: the EU’s accusations

In this article, we turn to a practical case in order to illustrate one of the ‘difficult issues’ involving Switzerland, an issue that is of both European and global importance. It concerns corporate taxation, ie the taxation of companies’ income by the state.

Obviously, the state needs income in order to be able to perform its tasks, such as providing healthcare, education and infrastructure, as well as securing law and order. For most states, corporate taxes are a major source of their income. Many states in different parts of the world have tried to organise their corporate tax regimes in such a manner that companies are attracted to the country, thereby creating income and employment. This leads to tax competition between states.

At the same time, the countries of origin of such companies will not be happy, as they are losing income and employment opportunities. There is, therefore, a tension between the legitimate aim of states to have attractive corporate tax regimes, on the one hand, and on the other the legitimate aim of other states not to lose these same companies or not to have them shift their profits to other countries. As you can imagine, that tension increases in times when states are in particular need of income and employment opportunities, such as in a situation of economic and financial crisis.

This tension is also experienced by Switzerland. In Switzerland, taxation is to a large extent a matter for the federal sub-states, the so-called Cantons, and within them the municipalities. Accordingly, there is also tax competition even within the country, namely between the Cantons and the municipalities. We will come back to the Swiss Federal structure later in this course week. For the time being, it suffices to state that some Swiss Cantons introduced corporate tax regimes that are (or in some cases were) extremely attractive for certain types of companies originating from abroad.

Outside Switzerland and in particular in the European Union (EU), this approach was not liked at all. In fact, the European Commission, which is one of the EU’s institutions, received complaints from different sides: from Members of the EU Parliament (another EU institution), from EU Member States and from companies. The Commission decided to look into the matter and to examine whether Switzerland, through the Cantonal tax regimes in question, infringed the Swiss-EU Free Trade Agreement of 1972. The Commission concluded that there was indeed such a breach. More specifically, it argued that, by applying a favourable tax treatment to these companies, Switzerland granted them what in legal terms is called ‘state aid’, in breach of the Free Trade Agreement. After it became evident that no solution to the problem could be found with Switzerland, the Commission put its findings in a formal decision.

On its website, the Commission at the time spoke about ‘predatory tax regimes’. It argued that:

it is hard to see how one could accept that a close neighbour like Switzerland, which benefits from a privileged access to the EU’s internal market and participates in a large number of EU programmes and other activities, maintains such tax schemes whose only objective is to attract foreign holdings. These holdings, which for the most part are just ‘letterbox’ or ‘brass plate’ companies, are now counted by the thousands and they deprive EU Member States of billions in tax revenue.

Switzerland very emphatically rejected these accusations, arguing notably that the Swiss–EU Free Trade Agreement does not cover tax matters.

Nevertheless, the Swiss Federal Government agreed to enter into informal talks with the Commission about this matter. We will hear more about the outcome of these talks at a later point in this course week. For the time being, we can conclude that Switzerland found itself facing the accusation that its domestic tax law was not in line with international rules, in particular with European regional rules in the form of the above-mentioned Swiss–EU Free Trade Agreement.

Having stated this fact, we invite you to reflect on whether you know of other examples around the globe where national tax regimes have faced accusations of breaching international rules.

Further reading

If you are interested in the legal details on the EU’s argument concerning state aid, read the relevant provision of the Swiss–EU Agreement in question:

Art. 23(1)(iii) of the Swiss–EU Free Trade Agreement of 1972:
1. The following are incompatible with the proper functioning of the Agreement in so far as they may affect trade between the Community and Switzerland: […] (iii) any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.

The official title of the agreement is ‘Agreement between the European Economic Community and the Swiss Confederation’.
Please note that, in 1972, the Agreement was concluded between Switzerland and the European Economic Community. The latter subsequently changed its name to ‘European Community’. More recently, namely with effect of 1 December 2009, it was incorporated into the European Union. Accordingly, the Agreement is today between Switzerland and the EU.

As for the Commission decision, the English language version is available here.

The references for this course are in a sense quite challenging, since ‘Switzerland in Europe’ deals with matters that evolve rather quickly. As the dispute about business taxes have recently been officially resolved, both the EU and Switzerland have removed certain information that used to be available on the internet. This might happen in other cases during this course as a lot of topics are at the moment being discussed and might be laid to rest. We are constantly monitoring the references and try to keep them up to date or find alternatives.

For the topic of company taxation and for those who would like to delve a little deeper we recommend now the following publication:
Christa Tobler, ‘State Aid Under Swiss-EU Bilateral Law: The Example of Company Taxation’, in: Mielle Bulterman, Leigh Hancher, Alison McDonnell and Hannah Sevenster (eds), ‘Views of European Law from the Mountain’. Liber Amicorum Piet Jan Slot, Austin/Boston/Chicago/New York/The Netherlands: Wolters Kluwer, Law & Business 2009, 195-205.
You can find the text in the download section below.